New Delhi: The Income Tax Bill 2025 has left long-term capital gains (LTCG) taxation on residential property unchanged, confirming that property owners will continue to be taxed at the same rates as before.
For property purchased before July 23, 2024, LTCG tax will be calculated as the lower of:
- 12.5% (without indexation), or
- 20% (with indexation)
- Plus applicable surcharge and cess
For properties purchased on or after July 23, 2024, the LTCG tax rate is fixed at 12.5% (without indexation), plus surcharge and cess.
Long-Term Capital Gains on Property Sales
Understanding LTCG Calculation
A property qualifies as a long-term capital asset if it is held for more than 24 months before sale. The taxable LTCG is derived after deducting:
- Cost of acquisition
- Cost of improvement
- Expenses related to the sale
According to Parizad Sirwalla, Partner & Head, Global Mobility Services, Tax, KPMG India, the net capital gain is determined by subtracting these deductions from the gross sale consideration.
For instance, if a property is sold for ₹1 crore, originally bought for ₹50 lakh, with ₹10 lakh spent on improvements and ₹2 lakh on selling expenses, the LTCG would be:
₹1 crore – ₹62 lakh = ₹38 lakh (Taxable LTCG)
Indexation: How It Lowers Tax Liability
Indexation is a key tax benefit that adjusts the purchase cost of a property for inflation, effectively reducing taxable gains.
Formula:
Indexed Cost = (Original Purchase Price × CII of Sale Year) ÷ (CII of Purchase Year)
For example, if a property was bought in 2010 for ₹20 lakh and sold in 2024 for ₹50 lakh, and the Cost Inflation Index (CII) for:
- 2010 = 167
- 2024 = 363
Then, Indexed Cost = ₹20 lakh × (363 ÷ 167) = ₹43.53 lakh
So, the taxable capital gain is ₹50 lakh – ₹43.53 lakh = ₹6.47 lakh, instead of ₹30 lakh without indexation.
"This benefit is available only to resident individuals and Hindu Undivided Families (HUFs). They must assess whether it lowers their LTCG tax liability," said Suresh Surana, a Mumbai-based chartered accountant.
How LTCG Tax Works Under the New Rules
Under Section 112 of the Income Tax Act, 1961 (now Section 197 of the Income Tax Bill 2025), LTCG tax on residential property follows these rules:
1. If Sold Before July 23, 2024:
-
20% tax (with indexation) + surcharge & cess
2. If Sold On or After July 23, 2024:
-
For property bought before July 23, 2024: Lower of 12.5% (without indexation) or 20% (with indexation) + surcharge & cess
- For property bought on or after July 23, 2024: 12.5% (without indexation) + surcharge & cess
Example Calculation for a Property Sale in 2025
Scenario:
- Property purchased on April 2, 2001, for ₹10 lakh
- Sold on February 24, 2025, for ₹50 lakh
Option 1: Without Indexation
LTCG = ₹50 lakh – ₹10 lakh = ₹40 lakh
Tax @ 12.5% = ₹5 lakh
Option 2: With Indexation
-
CII for 2001-02 = 100
- CII for 2024-25 = 363
- Indexed cost = ₹10 lakh × (363 ÷ 100) = ₹36.30 lakh
- Taxable LTCG = ₹50 lakh – ₹36.30 lakh = ₹13.70 lakh
- Tax @ 20% = ₹2.74 lakh
Since ₹2.74 lakh is lower than ₹5 lakh, the tax payable would be ₹2.74 lakh (plus surcharge & cess).
Final Takeaway
The Income Tax Bill 2025 preserves the current tax treatment for long-term capital gains on property, offering property sellers indexation benefits to reduce their tax liability.
Buyers and sellers should assess whether opting for indexation lowers their overall tax burden before making real estate transactions.
